Thursday, 6 August,Mumbai: Banks, led by state-run lenders, may need up to Rs 1 trillion over and above their Basel-III capital requirements to deal with concentration risks resulting from their high exposure to stressed large corporates, says a report.
Public sector banks alone may need a whopping Rs 93,000 crore of this amount, the report said, adding banks need an additional core capital of Rs 2.5 trillion under Basel-III guidelines.
“Banks may need up to Rs 1 trillion over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed corporates,” India Ratings said in a report today.
Public sector banks’ Rs 93,000 crore requirement is equivalent to an equity write-down of about 1.7% of their risk weighted assets (RWAs), and represents the loan haircut that they may have to take to revive the financial viability of distressed accounts, the report said, adding most exposures are treated as performing and carry minimal loan loss provisions.
The report, however, said, if corporates are able to reduce borrowing costs by 100 bps, the shortfall may come down to Rs 76,000 crore from the estimated Rs 1 trillion.
“While our analysis indicates a potential haircut on a blended basis at around 23-24%, banks may also consider a senior-subordinated structure for the current exposure,” the report said.
Last week, the government had said the public sector banks would need to raise Rs 1.10 trillion from markets to meet more than half of their capital requirement of Rs 1.80 trillion over the next four years to meet the Basel-III capital adequacy norms.
Of this Rs 1.80 trillion fresh growth capital, the government said it would provide Rs 70,000 crore over a period of four years, out of which they will be getting Rs 25,000 crore in FY16 and a similar amount in FY17. The banks would have to raise the balance amount from the markets, the ministry had said.
“The shortfall may increase the government’s equity injection requirement from Rs 70,000 crore announced on July 31,” the report said.
The agency said the access to equity will be a critical input to its rating of additional tier-1 bonds, as the instruments carry loss triggers linked to the bank’s common equity tier-1 ratio.
The rating agency has analysed 30 large stressed corporates, each with individual bank debt of over Rs 5,000 crore aggregating to about 7-8% of the overall banking system.
Bank loans to all these corporates are accounted as performing, with most of them figuring as special mention account 1 (SMA1) or SMA2 accounts.
The power and other infrastructure sectors account for 50% of this exposure while the iron and steel sector accounts for another 32%. Aviation, ship-building, sugar and textile bring up the balance, taking the overall bad loans and restructured assets to over 11.5% of the system as of end-March 2015.
These companies have seen a significant increase in their leverage over the last few years during a period with a weak operating environment.
The median debt-to-equity ratio for this set increased to 4-6 times in FY15 from just under 2 times in FY10 while the median market-cap-to-debt ratio contracted to 5-7% from 35-50%, the report added.
While most of these accounts could be the likely beneficiaries of the Reserve Bank’s 5/25 scheme targeted at providing liquidity support.
The report said banks would need a 24% reduction in their current exposure to ensure reasonable debt servicing by these corporates on a sustained basis.
“While companies in the power, other infra and iron and steel sectors would need a haircut of 20-30%, a few deeply levered names in the textile and sugar sectors might require a higher amount of debt reduction to the tune of 30-40%.
“In value terms, the amount of debt reduction needed is around Rs 1.04 trillion, of which share of state-run banks is about Rs 93,000 crore,” the rating agency said.
The report said state-run would need to build this additional amount through common equity tier 1 to mitigate any possible concentration risk arising out of these large ticket exposure.
The agency expects private sector banks and large state-run banks to be better placed in handling potential credit cost hikes from these large stressed corporates, given their sufficient operating and capital buffers.
The mid-sized state-run banks will be the most affected, given their operating margins and weak capitalisation.